Investors in hardwood flooring retailer Lumber Liquidators (LL) got the rug pulled on them last week when the company announced mediocre preliminary Q2 results and lowered its guidance for the year.
Weaker-than-anticipated traffic and macroeconomic headwinds for residential remodeling wreaked havoc on the company’s quarterly performance. Traffic was low due to a dip in demand for wood flooring and the company’s low inventory level for many key merchandise categories.
Was their any advance warning for such a report and the subsequent 20% drop in shares?
Yes, there was. The Zacks Rank quantitative model uses Wall Street analyst earnings estimate revisions to determine the relative strength or weakness of a company’s earnings momentum. On April 30th, LL slipped to a Zacks #4 Rank Sell when the stock closed at $87.16.
Investors got a second and stronger warning on June 17 when further downward estimate revisions dropped the stock to a #5 Rank Strong Sell. Shares were still trading above $78 on that day. Here’s the Zacks proprietary Price & Consensus chart that tells the story…
LL may continue to benefit from a strengthening economy and housing market. But until the Zacks Rank turns back up — and that means when analysts have revised the earnings growth outlook upward — it’s best to find another way to play those trends.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
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